Jim Lyons comments on business and marketing developments in the Printing and Imaging industry, combining many years of experience with an ever-enthusiastic eye on the future.

Tuesday, November 20, 2007

Live from New York...

Well, at least that's probably where most of the analysts were, on the HP (NYSE HPQ) earnings call yesterday afternoon, following the market close. HP discussed its generally great revenues and earnings, including surpassing IBM in the long-discussed but seemingly insurmountable goal of becoming the #1 technology company on Earth (though no mention of this milestone was uttered by the company), and then reviewed some of the underlying details and took some Q&A. From the transcript, here are the printer-related remarks with my comments in [brackets]:

[from the narrative portion of the call]Cathie Lesjak - Hewlett-Packard - CFODrilling in on the performance by business segment, during the fourth quarter, imaging and printing revenue grew 4% year-over-year to $7.6 billion, with supplies revenue growth of 6% and commercial hardware revenue growth of 5%. Consumer hardware revenue declined 5% year-over-year primarily due to the declines in appliance printers and cameras. Total printer hardware units were up 5% year-over-year.

This growth is slower than recent periods reflecting our decision to be more disciplined in our pricing of appliance printers and a tough prior year compare. Excluding appliance printers, total printer hardware units were up 9% year-over-year. In the consumer business, printer units were up 3% from the prior year lead by solid all in one unit growth. In the commercial business, printer hardware units were up 15% year-over-year lead by color laser printer shipments up 17% and printer-based MFP shipments up 26%.

In the fourth quarter, IPG delivered solid operating profit of $1.1 billion, or 14.5% of revenue including a charge of $32 million reflecting changes in the camera business model. This change in our camera strategy will have unfavorable impact of approximately one percentage point on IPG revenue in FY '08. Going forward, you will see us strategically taking out costs and realigning resources to build on our core business and accelerate our investments in growth initiatives.

[first question out of the chute]

Laura Conigliaro - Goldman Sachs - AnalystGreat. Well, starting with printers, printer unit growth has been coming down pretty noticeably over the past three quarters and supplies growth too. You've got another hard compare in the Jan quarter suggesting another mid-single digit unit growth rate in another weak supplies growth rate. How should we be viewing growth in these categories after that, and since you have been working at trying to separate supplies growth from unit growth, at what point might we start to actually see some benefit from that without the help of much incremental hardware unit growth?

Mark Hurd - Hewlett-Packard - Chairman, CEO & PresidentHi, Laura, Mark, I'll start.First, I think good question. I think we're pretty comfortable with mid to high single digit supplies growth and I think that favorably helps our business model. We're also comfortable with sort of mid-range, mid-single digit unit growth. To your point, we gained a heck of a lot of share coming off of a pretty rough 2003, 2004, and we're also being picky about the categories we're competing. Some of the areas as Cathie noted in the appliance-printer area , we're not seeing the supplies connect rate that you might want and so therefore, we're putting our money into areas that we think give us better connect, so we feel pretty comfortable with where we're headed.

Cathie also mentioned that if you actually took out the appliance growth rate on units and then looked at the core Inkjet and LaserJet, we had a pretty healthy unit growth rate in the quarter, certainly comparable to what we've seen in other quarters over the past two and a half years. So, I think you should think about those rates. If we get into those levels which we feel good about, we'll get favorable treatment in the business model, we feel good about that and we're continuing to be very tough in this IPG 2.0 transformation to be very focused on making sure that we look at every piece of the business and look at the value it brings so that we go to the real core places that we think we have opportunity to improve the business which is what you saw in the camera business model decision that we described.

We're also working very hard, Laura, and I don't mean to be too verbose with this but I want to make sure I give you a clear answer to this, we worked very hard to ensure that we have channel alignment on supplies inventory relative to the hardware opportunity during the quarter as well so it's really all of those dynamics tied up together and net-net you saw that if you took the camera charge out, IPG profit improved during the quarter, so we feel pretty good about our opportunities here but we still have a lot of work to do.